ICICI Direct has recommended a BUY rating on Narayana Hrudayalaya (NARHRU), a leading chain of multi-specialty hospitals, with a target price of Rs 1,485, representing a potential upside of 22% from the current market price of Rs 1,222. The healthcare company has demonstrated steady revenue growth, particularly in its Indian operations, and is executing an aggressive capital expenditure plan aimed at expanding its presence. With improving margins, a favorable specialty mix, and a strategic focus on higher growth areas, Narayana is well-positioned for future expansion, despite some near-term challenges.

Company Overview: Narayana Hrudayalaya’s Network and Performance

Narayana Hrudayalaya operates a robust chain of multi-specialty, tertiary, and primary healthcare facilities. The company specializes in areas such as cardiology, oncology, neurology, orthopedics, and gastroenterology, catering to a wide range of medical needs. Currently, Narayana Hrudayalaya operates:

18 hospitals in India,
3 heart centers,
17 primary healthcare facilities (including clinics),
A multi-specialty hospital in the Cayman Islands.
In Q1 FY25, the company posted total revenues of Rs 1,341 crore, reflecting an 8% year-over-year growth. The Indian segment, which accounts for Rs 1,085 crore of revenue, grew by 10% year-on-year. The Cayman Islands operations, while more subdued, reported a 5% growth to Rs 267 crore.

Revenue and Patient Growth in India

India remains the primary revenue driver for Narayana, with its hospitals spread across multiple geographies, including Bengaluru (34% of revenue), Kolkata (25%), and Northern India (17%). The company's average revenue per patient in Indian hospitals increased by 6% year-over-year to Rs 1,30,000, with the overall patient footfall growing by 6% to 650,000. Moreover, the ARPOB (Average Revenue Per Occupied Bed) for Indian hospitals stood at Rs 41,370, marking an 11% year-over-year increase.

Narayana’s focus on high-demand specialties such as cardiac sciences (33% of revenue), oncology (16%), and renal sciences (10%) has significantly contributed to its growth trajectory. Additionally, the company's diverse payor profile ensures stability, with 42% of revenues from domestic walk-in patients, 29% from insured patients, and 21% from government schemes.

Cayman Islands Operations: A Key Contributor to Growth

The Cayman Islands hospital continues to play a crucial role in Narayana’s international portfolio. Despite facing more modest growth rates, the facility remains highly profitable. In Q1 FY25, the average revenue per patient increased by 3% to US$31,900. The Cayman Islands business accounted for 20% of the company's overall revenue, contributing US$32 million.

Narayana is set to expand its presence in the Cayman Islands, with a second hospital expected to commence operations in H2 FY25. This new facility is part of the company’s broader strategy to capture international healthcare markets and further bolster its revenue streams.

Expansion Plans: Aggressive Capital Expenditure on the Horizon

Narayana Hrudayalaya has outlined ambitious capital expenditure plans of Rs 3,000 crore over the next 2–3 years. This expansion will focus on strengthening its position in major Indian cities, such as Bengaluru and Kolkata, where the company enjoys strong brand loyalty. The development of additional facilities is expected to further increase Narayana’s reach and enhance its ability to serve a growing patient base.

While this aggressive expansion will impact the company's free cash flow in the short term, Narayana is well-positioned to manage the capex impact, given its healthy margins and return ratios. Margins are expected to remain stable as the company continues to focus on optimizing its specialty and payor mix.

Insurance Foray and Margin Outlook

Narayana is also exploring a foray into the health insurance sector, although this initiative remains in the pilot phase. While the company has not yet provided detailed performance metrics for this new venture, it is seen as a potential long-term growth driver.

The company’s focus on reducing losses from newly established hospitals is already showing positive results, with improving margins across the board. Margins for the Indian business remain strong at 23% EBITDA, with the Cayman Islands contributing solid profitability.

Valuation: Target Price and Financial Metrics

ICICI Direct has set a target price of Rs 1,485, based on a sum-of-the-parts (SOTP) valuation. This target incorporates:

A 24x FY26E EBITDA multiple for the Indian operations,
A 15x FY26E EBITDA multiple for the Cayman Islands business.
With this valuation framework, ICICI Direct projects an upside potential of 22% from the current market price of Rs 1,222. The firm anticipates steady revenue growth coupled with improving profitability as the company continues to execute its strategic initiatives.

Key Risks: Capex Delays and Cayman Expansion Challenges

While the outlook for Narayana Hrudayalaya is largely positive, there are a few potential risks that investors should be aware of:

Delays in the capex plan – Any delays in the expansion projects, especially in Bengaluru and the Cayman Islands, could impact the company's long-term growth trajectory.
Slower-than-expected ramp-up at the new Cayman Islands hospital – If the new facility does not achieve the expected patient volumes and profitability, it could weigh on the company’s overall financial performance.

Investment Recommendation: BUY with Long-Term Growth Prospects

In summary, ICICI Direct’s BUY recommendation for Narayana Hrudayalaya is backed by the company’s strong operational performance, aggressive expansion strategy, and improving margins. Despite some near-term risks associated with capital expenditure and international expansion, the company’s focus on high-growth specialties and its robust revenue streams position it for long-term growth.

Investors looking for exposure to the healthcare sector with a focus on multi-specialty hospitals should consider Narayana Hrudayalaya as a compelling investment opportunity. The target price of Rs 1,485 offers significant upside potential, making this stock an attractive buy-and-hold candidate for long-term portfolios.